Rural Utilities Service:

Opportunities to Better Target Assistance to Rural Areas and Avoid Unnecessary Financial Risk

GAO-04-647: Published: Jun 18, 2004. Publicly Released: Jul 6, 2004.

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The Agriculture Department's Rural Utilities Service (RUS) makes loans and provides loan guarantees to improve electric service to rural areas. Beyond guaranteeing loans, under a yet-to-be-implemented provision of the 2002 Farm Bill, RUS is also to guarantee the bonds and notes that lenders use to raise funds for making loans for electric and telecommunications services. Fees on these latter guarantees are to be used for funding rural economic development loans and grants. GAO was asked to examine (1) the extent to which RUS' borrowers provide electricity service to nonrural areas and (2) the potential financial risk to taxpayers and amount of loans and grants that the guarantee fees will fund. GAO also identified an alternative for funding rural economic development.

While the Rural Electrification Act authorizes RUS' lending only in rural areas, borrowers that receive RUS loans and loan guarantees serve not only rural areas but also highly populated metropolitan areas. This condition stems from RUS' loan approval practices. RUS requires that borrowers serve rural areas when they apply for their first loans, but it approves subsequent loans without applying this criterion. Thus, RUS applies a "once a borrower, always a borrower" standard. Since the 1930s when the program began, substantial population growth has occurred in areas served by many RUS borrowers; 187 of the counties in which RUS borrowers provide service are in metropolitan areas with populations of 1 million or more. For example, three borrowers that received over $400 million in loans in fiscal years 1999 through 2003 distribute electricity in the immediate vicinity of Atlanta, Georgia. In contrast, about 24 percent of the counties served by RUS borrowers are completely rural, while the remainder have a mix of rural and urban populations. RUS estimates, in a worst-case scenario, that the requirement to guarantee lenders' debt could lead to taxpayer losses of $1.5 billion--and GAO estimated that in return for this risk, fees on the guarantees would add about $15 million per year in rural economic development loans and grants. RUS officials believe that while risks are involved, losses are unlikely given the past stability of both the electricity market and the lender that might receive the guarantees. Only one lender is both qualified and interested in obtaining these guarantees. According to financial rating services, that lender is well regarded, but worked through financial concerns in 2002 and 2003, and faces longer-term risks associated with the changes taking place in the electricity and telecommunications markets that it serves. Recognizing the risks of guaranteeing this lender's debt, RUS proposed certain risk mitigation requirements, such as a reserve against losses. However, the lender's officials have stated that RUS' proposed requirements would make the program unattractive. GAO identified an alternative with no additional taxpayer risk to add funds for rural economic development loans and grants. If RUS were authorized to charge borrowers a small loan-origination fee of one-fourth of 1 percent on loans it expects to make and guarantee in fiscal year 2005, $24 million in rural economic development loans and grants might be made available. This amount is almost equal to the level provided by USDA's 2005 budget request for rural economic development loans and grants, and would likely have a minimal cost impact on customers of distribution borrowers. This alternative would not include guarantees of lenders' debt. Furthermore, the lender expected to use the guarantees has indicated that, even without such guarantees, it expects to continue being very successful at accessing capital for lending.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress passed a 2008 farm bill but did not implement this recommendation.

    Matter: To better target RUS' lending to borrowers serving rural areas, Congress may wish to consider specifying that the program criterion for rural areas applies to both an initial loan and any subsequent loans that borrowers seek.

  2. Status: Closed - Not Implemented

    Comments: Congress passed the 2008 farm bill but did not implement this recommendation.

    Matter: To provide additional funds for rural economic development loans and grants without risk to taxpayers, Congress may wish to consider amending the RE Act to authorize a small loan-origination fee on RUS' electricity and telecommunication loans.

  3. Status: Closed - Not Implemented

    Comments: On July 20, 2005, OMB approved an apportionment of $1 billion for implementing a new lender debt guarantee program through USDA. USDA is proceeding with the program.

    Matter: To provide additional funds for rural economic development loans and grants without risk to taxpayers, Congress may wish to consider amending the RE Act to direct that fees collected on such loans be used for rural economic development loans and grants, and simultaneously repeal the new lender debt guarantee requirement.

 

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